With all the press and analyst speculation last year that the transition to mobile might undermine Facebook’s revenues this isn’t new news but reading an FT article this morning titled Digital cinders spark mobile forest fire the penny finally dropped for me that after the transition to digital shrank many industries, the transition to mobile will now shrink them further.
For those unfamiliar with the ‘digital shrinks businesses’ argument my favourite example is encyclopedias which went from a circa £700m book industry dominated by Britannica, to a c£70m CD Rom industry dominated by Encarta, to a £0 industry dominated by Wikipedia. This is the most extreme example I know, but there are many other good ones, particularly from the music and newspaper industries.
The fact that mobile is shrinking industries doesn’t mean that mobile businesses aren’t viable of course, they just have to find another way to make revenues or get by with lower advertising revenues per user. For startups looking to build long term sustainable businesses I think that leaves three broad options – selling stuff, a subscription model, or shooting for massive scale and relying 100% on advertising.
One of the lessons most investors learned from the web2.0 era was that whilst success pays out big really huge scale is required to make social media pay and the odds of any given startup getting there are slim. That’s why investment dollars chase the few that are breaking out so aggressively. That same lesson applies twice over for ad based mobile models.
Mobile adtech businesses like our portfolio StrikeAd are still in good shape though – largely because mobile media consumption and mobile ad spend continue to grow quickly. If CPMs are low these businesses can make the same revenues by simply selling more ads, and the inventory is there.
That said, if somebody could find a mobile ad format that monetises better then the whole ecosystem would be better off. There are a number of companies working on this now, including Loopme in the UK. I hope they succeed.